How to keep your money from losing purchasing power

“The Sopranos” was one of the most-watched series in television history. At one point, main character and mafia boss Tony Soprano was stashing money in a bag of bird food outdoors. This might sound funny, but if you’re keeping money in a bank account that isn’t paying interest, your future purchasing power is likely to take a big hit, too.

In fact, according to a March 2023 Bankrate survey, 16 percent of people weren’t earning any interest at all in their savings accounts, and another 24 percent were getting an interest rate of less than 1 percent.

Let’s say you had $40,000 hidden outdoors in 2002, and the money was still there today. Turns out you’d need $68,173.01 to purchase now what you could then, according to the CPI Inflation Calculator from the Bureau of Labor Statistics (BLS). That’s about a 59 percent increase in around 21 years.

So while Tony Soprano knew about many of his enemies on the series — inflation probably wasn’t on his radar.

Your money needs to (at least) keep up with inflation

Over time, inflation eats away at your purchasing power, if you’re not keeping up with it.

That’s concerning since, going back to 1959, there’s never been this much money in savings deposits at commercial banks.

A commonly used inflation gauge currently sits at 4.6 percent. Meanwhile, the national savings average yield is only at 0.24 percent annual percentage yield (APY), according to Bankrate’s weekly survey of bank accounts.

So, if your money is yielding less than 4.6 percent APY, you’re losing purchasing power.

With the average savings rate sitting much lower than the inflation rate, it might seem tough to beat rising prices. But, in fact, there are some top high-yield savings accounts paying more than 4.6 percent APY right now. Many of these high-yielding accounts have increased their rates alongside Fed rate hikes.

Remember, most interest you can withdraw without a penalty is taxed as ordinary income in the year you receive it. So you have to factor this into whether you’re staying ahead of inflation or not. The more time your money sits in a low-yielding account literally collecting dust, the less purchasing power you’ll have in the future.

Usually when clients see the benefits of a high-yield account they wish they took action sooner, says Paul Fenner, certified financial planner, president at TAMMA Capital.

“Taking that first step for folks is usually, always the hardest part,” Fenner says.

People generally don’t like change, especially when it comes to their bank accounts. A 2022 Bankrate survey found that the average U.S. adult holds onto the same checking account for 17 years. Direct deposits and bill payments are some possible reasons why people hold on to those accounts so long.

Savings accounts earning a low yield should be easier for people to part ways with, since generally they won’t have multiple bill payments or direct deposits attached to them.

“Technology has greatly enabled consumers in this area,” says Mark Meredith, certified financial planner, Meredith Wealth Planning, in Maryville, Illinois. “It’s so easy to see what rates are nationwide.”

What inflation does to your purchasing power

The only return that matters is what you earn after inflation, Meredith says.

“If you’re not even keeping up with that, then you’re destroying your wealth slowly over time,” Meredith says. “You’re not building any real wealth and local banks, around here, are really paying low rates on savings accounts compared to what you could get through an online bank.”

Sometimes when people see a monthly interest credit, they may say that they’re ‘earning’ a certain amount each month. Yes, a person earning 0.01 percent APY receives interest credits. But when comparing the APY to inflation, the result is a negative return.

“You’re just losing less,” Meredith says.

If inflation is currently around 4.6 percent, and your APY is less than this, Meredith says this is like an invisible tax on your money that’s not going to show up on a bank statement.

“But if their brokerage account goes down 1 percent, they definitely notice that,” Meredith says. “If you don’t see it, it doesn’t hurt as bad.”

While inflation is invisible, it can have real consequences over time.

For some, credit cards with rewards and sign-up bonuses can be an easy way to apply credits toward your travel. Or a sign-up bonus can help you apply money to charges you’re going to make anyway. Assuming you’re paying your statement balance each month, and not paying interest, these can save you money.

“People obsess over their credit card rewards,” Meredith says. “But they might have a hundred grand sitting at 0.25 percent (APY). So you’ve got to look at every detail. And if you’re not, you’re missing out.”

If you’re in a low-yielding account, here’s how much inflation is costing you

Many people are content with their money sitting in a low-yield account. But seeing how easily purchasing power can deteriorate, might lead some to take action to make up for lost value. There are a few ways to do this.

Personal finance articles talk about giving up a latte a day to save money. A different take would be comparing the cost of a pound of 100 percent ground roast coffee over the years.

• In March 1993, the cost was $2.46 per lb.
• In March 2023, the cost was $6.18 per lb.

That means the price of coffee increased by well over 100 percent during those 30 years, according to data from the BLS.

During that same period, $5,000 in 1993 has the same buying power 30 years later as $10,509.61, using the CPI Inflation Calculator.

This is why keeping up with inflation is so important. If your $5,000 didn’t earn any interest during that 30-year period, you’d need more than twice the money to purchase the same goods 30 years later.

A 30-year CD generally doesn’t exist. But if you had a $5,000 CD for 30 years earning 2.52 percent APY, you’d have around $10,549. That would help your money maintain its purchasing power during that time.

Making the change to a higher yield can be easy

A few years ago, Meredith says that he and his wife were saving a large amount of money to build a home. This wasn’t money he could afford to potentially lose in investments. But he also didn’t want to continue earning 0.25 percent APY, which he says was his bank’s yield at the time. So he put in about a half hour of work and switched to an online bank. He was rewarded with an APY four times his previous yield.

Some banks, such as Citibank, say you can open up an account online or apply for an account, in around five to 10 minutes. But some may have a longer process.

“I always try to state the dollar amount of interest they’re costing themselves because percentages don’t always speak as loudly to the customer,” Meredith says. “But if you say you’re earning $100 a year on ($100,000) and you could be earning $2,200 a year with 30 minutes of work, that a lot of times gives people a nudge to actually do something.”

If you already have an emergency fund or enough cash in savings, you may find that some money in a bank account should actually be invested to keep up with inflation. There are ways to potentially score higher returns through investments, such as stocks, which can be traded with a brokerage account.

But you could also lose some or all of your money going this route. Money that can’t be risked needs to be in an FDIC-insured account within insurance guidelines. When you’ll need to use your money and the amount of risk that you’re comfortable with will determine whether investments or bank accounts are the best fit.

You don’t have to constantly check the inflation rate, but being aware of both the APY you’re earning and inflation are important to at least maintain your current wealth. If you don’t, your hard-earned money won’t be able to purchase as much in the future, and that could put you in a real pinch down the line.

— Bankrate’s René Bennett contributed to an update of this story.